View RSS Feed

TSP Talk Blog

TSP Talk: Can stocks rally if yields spike?

Rate this Entry
Stocks raced through some stiff resistance like a hot knife through butter on Thursday. More big gains as the rally picked up steam off of Monday's lows. I'm not sure what was accomplished by the recent pullback, but the market sure acts differently than it used to many years ago, and a lot of that has to do with the tremendous increase in influence that the Federal Reserve and government spending has on the market and the economy. The action is good, but did the 5% pullback refresh all of the issues?

Daily TSP Funds Return


So much for the most bearish seasonal week of the year. So much for a post expiration week sell off. So much for Evergrande defaulting on their nine digit debt. So much for a test of the lows. So much for resistance at the 50-day EMA and the top of the open gap. So much for a 10% to 20% correction, although we did finally see a 5% pullback from the recent high to low. So much for investors being nervous before the debt ceiling gets hit. So much for a Fed who was expected to announce a date for tapering their bond buying program.

We have the fastest recovery ever from a recession, but more than a year later the Fed keeps interest rates at 0% and Wall Street is addicted to the easy money. Someday the Fed will have to raise rates - in theory - and Wall Street will freak out, but the Fed doesn't seem to want that done on his watch so the bears continue to get run over, and the buy and holders continue to look like the smartest people in the room.

Stocks are now up for the week, but still down modestly for the month, although they are doing everything they can to put in yet another higher low and reach for new highs again. Is this a tease or do we have to keep playing the game of a market that refuses to properly correct (10%) while the Fed just keeps feeding it and the government spends trillions to keep the economy afloat?

OK, so we don't live in a free market anymore, but certainly big companies are making a lot of money, taking advantage of the system that keeps on giving. Like I said, this market will likely throw a major tantrum once interest rates come off their 0% level, but the Fed may not have the courage to do it for years to come, so staying bullish may be the only option.

Back when I was getting interested in the stock market in the early to mid-1990's we had a very strong bull market. Not unlike the action of recent years. Strong bull markets tend to do that, as we saw last year with the Robinhood crowd who turned into day traders during the COVID crash rebound. But back in the 90's, even though the trend was clearly up, we had serious pullbacks and corrections all the time. Market timers had a lot more to work with that the 2 to 5% pullbacks we've seen over the last 18 months.

Between 1996 and the peak of 2000 there were probably more than 8 corrections of 10% or more in less than five years. Then the volatility started during the dot com bubble bursting so it was a trader's market. It's never easy but there were certainly more opportunities.




It may come back again someday and the insta-dip buyers will get burned, but for now, they are having a field day.

Yesterday the yield on the 10-year Treasury spiked sharply higher and moved above its recent highs and resistance. There's nothing wrong with that as long as it doesn't take off at too fast of a pace.




Back in February and March we saw a couple of sharp spikes in yield and the stocks market moved counter to those rallies in the 10-year. The reason is, eventually the 10-year yield can get to the point where it is paying enough for some large money managers of rich folks to take the safe return rather than fish in the volatile stocks market, which of course is not that volatile at the moment.




If I had a billion dollar account and I could lock in a 2% return, I'd make $20,000,000 a year guaranteed in a 2% bond. We don't have billion dollar accounts so we don't have to make those decisions, but rich folks and retired folks do make these decisions and at some point the yield in bonds is attractive enough to pull money out of the stocks market.

Also, high yields impact interest rates which impact companies' bottom lines if they have debt, which most companies do.

I'm not saying we are there yet. The stock market seems to be as stable as could be for now, despite the list I made above. It looks like we're out of trouble, but you never know. But keep an eye on these yields and the rate of change. It could make a difference in the next several months.





The S&P 500 (C-fund) has had a series of mini pullbacks in 2021 to the 50-day EMA that all turned out to be short-term buying opportunities. This last one fell through the 50-day EMA so I thought we'd have something different, but the 100-day EMA took charge and did what the 50-day EMA had been doing. The 200-day EMA hasn't been touched since June of 2020. It's at 4120 and doesn't seem to want to join the party any time soon.




The DWCPF (S-fund) put together back to back monster gains after its sharp pullback. 2260 looks like it could be a meaningful area, but it got passed there fairly easily last month. Or is this going to turn into a head and shoulder pattern?




The EFA (EAFE Index / I-fund) was up and the dollar was down and that translates into good gains for the I-fund. There's still some possible resistance in the 81.50 area, but resistance has been nothing more than a temporary annoyance for some charts lately. There's still an open gap near 79.20, so that's always a possible target.




The BND (bonds / F-fund) tanked on the rally in yields and the lower end of the bearish looking channel is getting tested. Bear flags tend to break down, and while I have been saying this looks like a bear flag, there is not a major flag pole so it's a little unorthodox.




The Dow Transportation Index rallied nicely to move back above the July lows. There is still some overhead resistance and yesterday's action did fill in a small open gap. The 50-day EMA crossed below the 100-day EMA and that's usually a sign of a needed relief rally. Whether it becomes more than that remains to be seen.




Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php

For more info our other premium services, please go here... www.tsptalk.com/premiums.html

To get weekly or daily notifications when we post new commentary, sign up HERE.

Thanks for reading. Have a great weekend!

Tom Crowley



Posted daily at www.tsptalk.com/comments.php

The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.

Submit "TSP Talk: Can stocks rally if yields spike?" to Digg Submit "TSP Talk: Can stocks rally if yields spike?" to del.icio.us Submit "TSP Talk: Can stocks rally if yields spike?" to StumbleUpon Submit "TSP Talk: Can stocks rally if yields spike?" to Google

Comments

  1. TommyIV's Avatar
    Back when I was getting interested in the stock market in the early to mid-1990's we had a very strong bull market. Not unlike the action of recent years. Strong bull markets tend to do that, as we saw last year with the Robinhood crowd who turned into day traders during the COVID crash rebound. But back in the 90's, even though the trend was clearly up, we had serious pullbacks and corrections all the time. Market timers had a lot more t
    o work with that the 2 to 5% pullbacks we've seen over the last 18 months.

    Between 1996 and the peak of 2000 there were probably more than 8 corrections of 10% or more in less than five years. Then the volatility started during the dot com bubble bursting so it was a trader's market. It's never easy but there were certainly more opportunities.




    It may come back again someday and the insta-dip buyers will get burned, but for now, they are having a field day.


    We may talked about this before, but do you think there is a significant effect, especially on dips today, from retail investors? Or are their trades overshadowed by big money moves? I'm talking effect on entire indices not meme stocks. If so that may account for the shorter dips now that Joe can trade from his phone in line at Arby's.
  2. tsptalk's Avatar
    That's certainly part of it, but I think program trading is more prevalent. They may or may not be money managers, but trading conglomerates, if you will.

SPY (C Fund) (delayed)

(Stockcharts.com Real-time)
DWCPF (S Fund) (delayed)

(Stockcharts.com Real-time)
EFA (I Fund) (delayed)

(Stockcharts.com Real-time)
BND (F Fund) (delayed)

(Stockcharts.com Real-time)

Yahoo Finance Realtime TSP Fund Tracking Index Quotes